Wednesday, November 30, 2011

Morning myth busting: “the government can always pay”

The myth behind all modern economics, which is to say Keynesian economics, is that “the government can always pay.”

It was one of the myths that allowed governments to think they could get away with bailouts, backstops and efforts to “stimulate” their country’s economies with truckloads of borrowed money (a failure of economic theory now exploded by the failure of all economies to be so “stimulated”).

But the debt is now due for all that senseless borrowing. And they can’t pay. They just can’t. There isn’t enough money in the world to pay all the debts they all racked up in a vain attempt to turn bad times into good.

That is the root of the problem in the US, in Japan, in Greece, in Italy, in Spain … and now in Germany.

Because last week saw the beginning of the collapse of even German government bonds (the market for which hit the jitters last week) which suggests the myth that “the government can always pay” is being exploded.

If even the German government can’t attract buyers of its debt, then what’s the future for every other government? Including ours?

Schlichter's advice to short Bunds is sage - the only way to protect yourself against "mass psychosis" is to do the exact opposite of the mass.

Given the current low yields on Kiwis (http://www.bloomberg.com/news/2011-11-24/loomis-loving-kiwi-bonds-means-record-low-yields-for-next-prime-minister.html) and the fact our Government won't get close to achieving its much-vaunted 4% growth targets (which the IMF has just revised downwards), our own bonds are looking ripe for shorting.

During the boom hundreds of millions (or billions) worth of real resources are poured into 'investments' which, when the bust comes, are now valued at very little or even nothing at all.

The money, and the real resources, have been used up in these malinvestments.

But that's only Crash 1.0. We've had that. Now we've got to recover from the "Stimulus," paid for (when it was paid for at all) by government bonds.

When we have Crash 2.0 it will be seen that trillions and trillions of dollars/Euros/pounds have been spent buying government bonds, the value of which is slowly turning to zero--which means turning the pool of real savings into lard.

... is this based on the presumtion that the bad loans are written off, then?

Because if they are not written off, the money can not have vanished, cant it?, despite having been spent on a bad investment producing no return - not the same thing as the actual disappearnace of money, is it?.

If you lent me $100 and I decided to burn it, then I would still owe it to you, so the "money" would still exist?

As for bad govenrment debt, then presumably that can be inflated out of existence (or defaulted on/ written off)?

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Comments on this post

Morning myth busting: “the government can always pay”
"There isn’t enough money in the world to pay all the debts..."

if the money existed to make the original loans, by what mechanism has it managed to vanish off the planet?
Schlichter's advice to short Bunds is sage - the only way to protect yourself against "mass psychosis" is to do the exact opposite of the mass.

Given the current low yields on Kiwis (http://www.bloomberg.com/news/2011-11-24/loomis-loving-kiwi-bonds-means-record-low-yields-for-next-prime-minister.html) and the fact our Government won't get close to achieving its much-vaunted 4% growth targets (which the IMF has just revised downwards), our own bonds are looking ripe for shorting.
@drunken watchman, you asked: "...if the money existed to make the original loans, by what mechanism has it managed to vanish off the planet?"

The money (paper money, or money backed by paper) was created out of thin air, and poured down financial black holes.

But instead of giving back a return, the black holes have swallowed it.
...in fact all that money is wallpapered into those crappy old 1940s houses costing over $3/4million in Auckland.

When they crash and become worth their real $120,000 all those trillions that were magiced into being will vanish.
@KP: Aye, KP, that's the thing.

During the boom hundreds of millions (or billions) worth of real resources are poured into 'investments' which, when the bust comes, are now valued at very little or even nothing at all.

The money, and the real resources, have been used up in these malinvestments.

But that's only Crash 1.0. We've had that. Now we've got to recover from the "Stimulus," paid for (when it was paid for at all) by government bonds.

When we have Crash 2.0 it will be seen that trillions and trillions of dollars/Euros/pounds have been spent buying government bonds, the value of which is slowly turning to zero--which means turning the pool of real savings into lard.
... is this based on the presumtion that the bad loans are written off, then?

Becasue if they are not written off, the money can not have vanished, cant it?, despite having been spent on a bad investment producing no return.

As for bad govenrment debt, then presumably that can be inflated out of existence (or defaulted on/ written off)?

The latter is not the same thing as the actual disappearnace of money, is it?.

If you lent me $100 and I decided to burn it, then I would still owe it to you, so the "money" would still exist?
sorry, got a paragrah in the wrong place. Should read

... is this based on the presumtion that the bad loans are written off, then?

Because if they are not written off, the money can not have vanished, cant it?, despite having been spent on a bad investment producing no return - not the same thing as the actual disappearnace of money, is it?.

If you lent me $100 and I decided to burn it, then I would still owe it to you, so the "money" would still exist?

As for bad govenrment debt, then presumably that can be inflated out of existence (or defaulted on/ written off)?